Supply Chain Finance vs B2B BNPL


57% of small and medium sized enterprises (SMEs) suffer from cash flow issues. This makes routine things like paying salaries, meeting tax deadlines and covering overheads uncertain and unnecessarily stressful. In an ongoing blog series, we are exploring the different financing options available to businesses and pitting them against B2B Buy Now, Pay Later (BNPL).

Sometimes buyers will be proactive and offer a way for their suppliers to get paid early through a lender. When this happens, it’s usually called supply chain finance. It’s a financial solution that helps optimise the flow of funds along a supply chain. This involves collaboration between buyers, suppliers, and financial institutions to improve working capital efficiency and manage cash flow challenges within the supply chain ecosystem.

Meanwhile, B2B BNPL is a form of financing that enables sellers to ease cash flow issues while offering flexible payment terms to buyers. B2B Buy Now, Pay Later is like having your cake and eating it. You get paid upfront and in full, while your customer gets to defer payment.

Please be aware that while this guide is intended to be helpful, it is not financial advice. 

B2B BNPL vs supply chain finance: an overview

The table below shows an overview of how B2B Buy Now, Pay Later stacks up against supply chain finance.

Supply Chain Finance B2B BNPL
Get invoices paid faster
Improve day-to-day cash flow
Grow your business with more capital
Offer more choice to buyers
Draw down financing as needed
Grow your customer base without taking on risk

Let’s dive in and learn more about supply chain financing and B2B BNPL.

What is supply chain finance?

Supply chain financing is quite similar to invoice factoring, but it’s the other way around. Instead of the merchant seeking to be paid early on their invoice, the buyer will offer it. That’s why this type of business lending is often called “reverse invoice factoring”. 

Some buyers will organise early invoice payments for their suppliers across the whole supply chain. This is especially true for very large buyers with a vast web of 50+ suppliers. 

The buyer will partner with a lender that can provide early invoice payments to the supplier. The supplier will often need to pay a fee to the lender for this service. 

Sometimes supply chain finance may be provided to make life easier for the merchant. But often, it’s for practical reasons. Many suppliers need to have access to capital upfront. For example, a builder will need to buy bricks and cement before he or she can start building. Or a B2B recruitment firm will need to pay specialists to search for job candidates. 

If your company needs at least some of the payment upfront to buy materials or pay staff, supply chain finance could be a useful option.

Supply chain finance is sometimes also known as:

  • Supplier finance 
  • Reverse invoice factoring 
  • Reverse factoring 

What are the advantages of supply chain finance? 

Supply chain finance offers several advantages to all parties involved, including buyers, sellers and the institutions providing the finance. Here are some of the key benefits for sellers:

1. Improved cash flow

With supply chain finance, sellers can receive early payment for their invoices which helps to address their cash flow challenges and eradicate the need to wait for payment. This helps them manage operational costs, invest in growth and meet financial obligations more effectively.

2. Strengthened relationships

By providing early payment options to suppliers, buyers can enhance their relationships with suppliers. This fosters goodwill and can result in better collaboration and increased reliability within the supply chain.

3. Reduced financial risk

Supply chain finance can reduce the risk of supplier default or bankruptcy, as suppliers have access to funds earlier and are better able to fulfil their financial obligations. This helps maintain a stable supply chain and ensures the availability of critical goods and services.

4. Lower financing costs

Suppliers can often access financing at a lower cost through supply chain finance programs compared to traditional lending options. The discounts or fees associated with early payment are generally lower than what suppliers might pay for other forms of short-term financing.

5. Accessible credit

A major advantage for the supplier is that it can benefit from the credit of the buyer. This is especially useful for businesses with low or limited credit ratings. 

6. Minimal effort

Unlike some other finance products, the process is usually straightforward for sellers. The buyer will be the party to do most of the work. 

What are the disadvantages of supply chain finance? 

While supply chain finance offers various benefits covered above, there are also potential disadvantages for sellers to consider. Here are the main disadvantages to be aware of:

1. It’s not available for all sellers

It could be difficult for some suppliers to access. This type of finance is usually reserved for buyers’ top sellers so sometimes excludes smaller ones. 

2. No interest rate control

The supplier does not have control over the interest rates, as they are determined by the credit rating of the buyer. If the buyer’s rating goes down, the supplier will be the one to pay the price. 

3. The fees

Suppliers who opt for early payment through supply chain finance programs are required to pay a fee (or discount) to the financial institution. This fee represents the cost of accessing funds before the original invoice due date. Over time, this can accumulate and impact your profit margins – especially if they’re tight to begin with.

4. Weakened relationships

We know that we said supply chain finance could strengthen buyer/seller relationships, but it can also go the other way. There’s a risk that the buyer's involvement in the supplier's financial affairs could lead to power imbalances or strain on the relationship.

What type of business could benefit from supply chain finance? 

Supply chain finance is suited particularly well to:

  • Businesses with buyers that offer supply chain finance. You can’t access it if it’s not on offer.
  • Those that need capital upfront to buy materials. 
  • Sellers who have a weaker credit rating than their buyers.

What type of business is not a good match? 

Conversely, it’s not so good if:

  • Your buyer does not offer supply chain finance.
  • You’re a small supplier that doesn’t qualify for financing from your buyers.
  • You prefer to remain in control of your interest rates and already have enough capital to buy materials.

What is B2B BNPL? 

At this point, it’s likely that you’ll have heard of or used BNPL as a consumer. At the checkout, e-commerce customers have the choice to pay in 30 days or break their payment down into three monthly instalments, courtesy of a provider like Klarna, Clearpay or even Apple. Even though the customer delays payment, the merchant receives funds upfront and in full (minus a small fee).

However, this is nothing new. Sellers of furniture and kitchen appliances have offered services like these for years. Similarly, B2B trade has relied on trade credit for decades, which works on the same principle of deferring payment.

What is new, however, is the technology. It’s part of a wider trend called “embedded finance”, and it has been ground-breaking for online sellers.

Now, BNPL has begun to enter the world of B2B. With the click of a button at the checkout, buyers get their preferred terms while sellers get paid instantly. It’s similar to invoice factoring, but much faster. 

What are the advantages of B2B BNPL? 

Some of the core benefits of B2B Buy Now, Pay Later include:

1. Payment upfront and in full

Sellers receive full payment upon delivery of the goods, which significantly improves any cash flow issues. This enables you to redirect time, money and resources to reaching growth goals.

2. You keep the full payment, even if your buyer defaults

With solutions like Hokodo’s, suppliers receive and keep the full amount of the invoice, even if the buyer defaults.

3. Buyers benefit from generous payment terms

BNPL solutions don’t just benefit you – they also empower you to offer better payment terms to your buyers. This leads to better conversions and enhanced customer loyalty.

4. It saves time and resources

B2B BNPL brings the full trade credit management process under one umbrella. It saves you the time and resources associated with fraud checks, credit scoring, financing, insurance, payment processing and collections.

5. It can be integrated into your checkout

B2B BNPL platforms offer plug-ins and integrations that make onboarding a breeze. Buyers get a smooth checkout experience and you don’t have to deal with any of the admin of selling your invoices to a factor.

6. The B2B BNPL provider takes responsibility for risk

Which means you are fully protected against credit and fraud risks.

7. No need to put up collateral

For some forms of financing, businesses are required to put up some form of collateral or security. Like factoring, this is not necessary with B2B BNPL.

What are the disadvantages of B2B BNPL? 

On the other hand, there are a small number of potential disadvantages to consider:

1. It might not be ideal for sellers without an online checkout*

You may not have an online platform, or your buyers may prefer to pay via traditional invoices. *This can be a challenge with some providers, but Hokodo’s solutions can be integrated into offline sales journeys.

2. Your buyers will deal directly with a third party lender

The B2B BNPL provider you partner with will be responsible for collecting payment and contacting your buyers. If handled incorrectly, this could impact the business relationship. 

3. The fees

Like with supply chain financing and many other financing types, there is a fee. The pricing model varies from supplier to supplier. With Hokodo, you pay a small % of the value of each order that is paid for with BNPL. 

What type of business could benefit from B2B BNPL?

B2B BNPL can benefit a variety of business types including:

  • E-commerce sites, marketplaces or other platforms where suppliers sell online. 
  • Business with online and/or offline sales that want to harmonise their payment processes across channels.
  • Businesses that want to offer trade credit in an online setting.
  • Businesses which need invoices paid quickly for cash flow but want to offer competitive payment terms to buyers.

Manchester-based wholesaler Shonn Brothers is just one seller reaping the benefits of a B2B Buy Now, Pay Later solution. 

“Hokodo has provided an innovative and revolutionary experience for our wholesale and trade customers giving them the opportunity to Buy Now, Pay Later,” explains Daniel Shonn, Director. “It is an interesting proposition with great sales potential.”

What type of business is not a good match?

There are a small number of scenarios where B2B BNPL might not be the right fit. These include:

  • Businesses that do not have an online platform and don’t want to embrace a digital solution for offline transactions.
  • Businesses offering bespoke services that require manual invoices.

Supply chain finance vs B2B BNPL: which is right for you?

If you are a B2B seller making online or offline sales, Buy Now, Pay Later might be a great option, not just for you, but also for your buyers. It gives them the option to defer settlement, while you receive payment upfront and are protected against fraud and credit risks. Make sure to take the time to check that you’re happy with the lender who could be dealing directly with your clients. 

If your buyer offers supply chain finance, it could be a valuable option to have, even if you don’t always use it. Before signing up, check the terms and conditions closely and ensure that changes to your buyer’s credit score do not impact the interest rates you pay. 

Download our ultimate guide to learn more about your options when it comes to B2B financing.